Wal-Mart net aided by inventory rein

Retailer cautious as energy prices, interest rates rise

CHICAGO (MarketWatch) -- Wal-Mart Stores Inc. said Tuesday that its hard-line approach to keeping inventory in check and its new mix of merchandise helped it post better-than-expected first-quarter profit.

But the world's largest retailer said that rising costs for gasoline, utilities and higher interest rates are a potential drag on second-quarter income.

Analysts were unfazed by the warning, noting that Wal-Mart's efforts to improve its products and shopping experience as it tackles Target Corp. more directly are showing progress.

"Wal-Mart posted a strong first quarter despite facing pressure from cost challenges and an uncertain consumer outlook," UBS analyst Neil Currie wrote in a research note.

"Given the amount of restructuring that has taken place (since October), these results reveal that Wal-Mart is managing well despite the cautious forward tone," he said.

Investors seemed to agree, pushing shares of Wal-Mart
WMT, -0.55%
higher by as much as 1.4% before closing up 0.64% at $48.07 -- a level they haven't touched since late March.

For the quarter that ended April 30, Wal-Mart logged a 6.3% increase in net income to $2.62 billion, or 63 cents a share, compared with last year's profit of $2.33 billion, or 55 cents a share. Last year's results included benefits of $145 million, or 3 cents a share, linked to a favorable tax resolution and legal settlement.

Revenue climbed 12% to $80.47 billion. Same-store sales, which tally receipts at stores open longer than 13 months, climbed 3.8% in the United States, with Wal-Mart stores up 3.8% and Sam's Club outlets gaining 4.3%.

At the Wal-Mart stores, sales rose 10% to $52.5 billion, while they climbed 6.8% at Sam's Club to $9.78 billion. The international division -- considered an important growth engine for the retailer -- surged 23% to $17.34 billion, helped mostly by acquisitions.

Wal-Mart made three notable buys throughout the year. It boosted its holding to 53% in Seiyu Ltd., based in Japan; it bought 51% of Central American Retail Holding Co., or CARHCO, now known as Wal-Mart Central America; and it purchased Sonae Distribuicao Brasil S.A. in Brazil.

The results outpaced those expected by analysts reporting to Thomson First Call. Analysts surveyed were projecting, on average, a profit of 61 cents a share on revenue of $80.43 billion. The average Thomson First Call estimate was raised by a penny after the Bentonville, Ark.-based retailer reported earlier this month that April sales were unexpectedly robust. See more retail coverage.

Keep the goods moving

Wal-Mart executives pointed to moves they're making to clear shelves of clutter, clean out back rooms and risers of inventory that customers can't see or reach and reduce the amount of merchandise that's held in outside warehouses near stores.

The better mix of merchandise, from skirts and pants to housewares and food, also helped he added. "We're being more relevant to our customers."

Customers have responded well to a number of new product lines and items that Wal-Mart has launched as it reaches out to a broader audience. It has had trouble keeping shelves stocked with Metro 7 apparel, for example, and executives have said that the nearly 500 organic-food products in its Plano, Texas, store have sold quite well.

Those initiatives also helped drive higher average receipts. But they haven't done much for customer traffic, which declined "just slightly" in the quarter, according to Schoewe.

In the meantime, customers -- as well as operations -- are facing higher energy costs that the finance chief said he believes will hinder second-quarter results. "Toward the end of the [first] quarter -- and that was April -- we clearly saw the impact of rising fuel costs for our customer."

Charles Holley, senior vice president of finance, said in an interview with MarketWatch that the retailer fears the pinch of higher gas prices will bring back what's called the "payroll cycle," in which sales drop off at the end of the month as consumers run out of money before their next paycheck.

"If you look back at the last couple of years, when energy prices spike we see the payroll cycle become more pronounced," he noted. "We can't predict what impact it's going to have, but history tells us it will produce softer sales than normal."

"Having said that," he added, "some of that the things that we're doing can offset that."

Holley also said that the company is bracing for higher store-operating costs and rising interest rates. "The biggest unknown in the second quarter and the year is the effect of energy prices on sales and utility costs. We can control somewhat the utility costs and such. The hardest thing for us to control is sales -- and what can happen to them."

That was the thinking behind a second-quarter earnings estimate in a range of 70 cents to 74 cents a share. At Thomson First Call, the average forecast is 74 cents.

The company is holding steady on the fiscal-year range of $2.88 to $2.95 a share, according to Holley, mostly because of tax rates that he expects will bounce around quarter to quarter, assuming Congress renews the worker-opportunity tax credit in the third quarter as expected.

J.P. Morgan analyst Charles Grom said he was surprised that Wal-Mart didn't raise its expectations and suggested that the retailer was leaning heavily on the side of caution.

"We expected Wal-Mart to have a solid quarter with a good-quality EPS, healthy inventories and a positive tone," he said in a note to clients. "That said, it appears that energy costs are negatively impacting both the company's top line and cost structure."

"All in, while the first quarter was solid in many aspects, we believe these factors were already factored in and feel the company's outlook for the second quarter and fiscal year could outweigh these results," he said.

Wal-Mart's results came a day after Target
TGT, -0.52%
its closest rival, turned in a 12% increase in income. Investors were disappointed, however, with pinched margins due to higher expenses and merchandising woes in the home-goods and Global Bizarre divisions. See full story.

Target's sales and profits have been growing at a faster clip than Wal-Mart's, which had put Wal-Mart out of favor with many analysts for some time.

However, since the beginning of the year, analysts have been changing their tunes about Wal-Mart, with the majority of them now recommending the stock.

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